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Are You the Market's 'Sucker'? - Part 1

The investment world is filled with misleading "facts" and flashy "materials" that cause investors to lose money. If one blindly follows what the average investor thinks and does, they are likely to wind up being the "sucker" in the market. If, on the other hand, an investor digs a little deeper and attains a unique insight on the market or "edge", then the probability of profitability increases dramatically.

For Example:

Is there really a "can't lose", "best" asset class? Is it really "impossible" to time the market? Let's take a look:

According to this chart, on the surface it appears there is a "best" asset class.

Gold versus Stocks 1970-2012

On the surface:

  • Stocks appear to be a far better investment over a very long period of time.

Why it is misleading:

  • The timing of the $100 investment is the most important factor as it greatly affects the end result. You will notice an opposite result in the chart below.
  • The distorting effects of inflation make these assets harder to analyze.
  • The extremely long timeframe is not realistic for most investors.

But according to the above chart, stocks must qualify as the best "Long Term" investment; right? Wrong. Consider the following longer term chart.

Example 2:

Gold versus Stocks 1966-2012

On the surface:

  • Gold appears to be a far better investment.

Why it is misleading:

  • The timing of the $100 investment is the most important factor as it greatly affects the end result. Note the opposite result from the first chart.
  • The distorting effects of inflation make these assets harder to analyze.
  • The extremely long timeframe is not realistic for most investors.

We can see from the above chart that over an even longer period of time Gold appears to be a better investment, but this too is misleading. Most people don't have a 46 year investment time horizon, and sitting through a twenty year bear market from 1980 to 2000 would be very costly.

What did we learn from the above examples?

Less Important: Which is a better investment long term?

Most Important: TIMING

What happens if you don't have 46 years to invest? Does it make sense to invest mainly in a long term bull market or should you simply invest in your "favorite" investment?

In the following examples we will remove the effects of "inflation" by creating a "ratio" out of our $100 gold investment and $100 stocks investment made in 1966. This way we can clearly see which asset is over or under performing simply from the line on the chart moving up or down.

Gold versus Stocks Ratio 1966-1980

As we can see in the chart above, if you invested in the 1970's, the clear long term trend was in Gold. When the yellow line heads up Gold is clearly outperforming stocks. We can see that big picture market timing is the key to success here.

Gold versus Stocks Ratio 1966-2000

In this chart we can clearly see that the long term trend is in stocks. As the yellow line heads down stocks is out performing gold. During this 20 year trend investors fell in love with stocks as a "favorite" asset class. Big picture market timing is once again the key to success here.

Gold versus Stocks Ratio 2000-2012

In the above chart we can clearly see that gold has been outperforming stocks. Once again recognizing the big picture, long term trend is the key.

We just demonstrated that timing a bull market is likely much more important to success than which asset class an investor thinks is the best long term investment. Unfortunately most investors have been lead to believe that it is "impossible" to time these "mega moves" and therefore it should not even be attempted.

If investors are aware that they can identify and time long term trends then:

  • The playing field with those in the "know" will be a little more even. The average investor will be more of a "player" in the investment game.
  • The average investor may better understand "cycles" and the affects of "inflation" on their investments. This understanding may not benefit some entities such as governments, banks and other large institutions, but it would probably benefit the individual investor.

But can an investor "time" the market? Will investors be doomed to suffer magnificent losses if they attempt to "time" the market? How can an investor locate a "long term trend"? What if the long term trend has already started? How can an investor identify when a trend may be nearing an end? At www.investmentscore.com we strongly believe in the power of timing the long term trends. To address the above questions we will release a follow up article through our free newsletter service. You can subscribe to our free newsletter to catch our updates at www.investmentscore.com.

 

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